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European ETFs: A Surge in Popularity?

August was a rough month for global equities as concerns over higher rates and geopolitical worries kept stocks in check across the board. In fact, during August, SPY lost a bit over 4% in the time frame, bringing the year-to-date performance for the key fund down to a 12% gain.

While the month was somewhat rough in the U.S., European stocks held up better than most. Many of these stocks also slumped in the time frame, but it appears as if sentiment is turning thanks to stronger data, less worries on the debt front, and a firmer currency (see all the European ETFs here).

It looks as if ETF investors are also starting to take note of the trend and are betting on the space for the longer term. This is evidenced by recent inflows into the space, as many European and EAFE funds are leading the way in inflows for the trailing month.

Top European ETFs

For inflows for the top five unleveraged products, European (or at least broad developed market ETFs) occupy four spots. All four also pulled in more than half a billion dollars, a pretty impressive feat considering that it was one of the worst months on record for the broader ETF industry as more than $17.7 billion was lost in terms of monthly flows.

Interestingly, the two biggest winners in inflows were the Vanguard FTSE Europe ETF (VGK), and the iShares MSCI EMU ETF (EZU), which added, respectively, $1.5 billion and $970 million in the past month. This is rounded out by the iShares MSCI EAFE ETF (EFA) and the FTSE Developed Markets ETF (VEA) as these added, respectively, $850 million and $570 million for the time frame (See Europe ETF Investing 101).

This is quite the contrast when investors consider that nearly $15 billion flowed out of SPY in the same time period, while a number of other key products, such as those tracking emerging markets or even financials (XLF) or staples (XLP), saw more than $1 billion in outflows as well.

The push towards European ETFs also continues the solid trend that investors have been seeing in the summer quarter. All four of the European-focused ETFs mentioned above have seen solid inflows in that time frame too, with VGK adding more than $2.2 billion in the period.

What Does This Mean?

Clearly, investors are starting to buy into the European recovery story, and are putting their money into European-focused ETFs in order to play the trend. Broad European products are leading the way, while funds that have a focus on developed markets and the EAFE region are seeing solid interest levels too (read 4 Outperforming ETFs Leading Europe Higher).

This is pretty impressive considering the sluggish trading in the U.S. market during the time frame, and the general disdain for American large cap stocks over the past month. Should this trend continue, it could suggest that Europe may be due for a bounce and that a broad play on the region may not be a bad idea.

Other Top Funds for Inflows

Beyond Europe, investors may also want to consider mid-caps if they are looking for a domestic play instead. Over the past month, the iShares Core S&P Mid-Cap ETF (IJH) actually led all funds for inflows in the time frame, pulling in roughly $2.14 billion.

Meanwhile, the ProShares Ultra Midcap 400 ETF (MVV) dominated the leveraged sphere, as it attracted more than $1.3 billion, putting it almost a billion dollars ahead of any other leveraged fund in the time period (see all the Leveraged Equity ETFs).

Bottom Line

This suggests that investors are cycling out of large cap U.S. stocks (to some extent) as well as emerging markets and longer dated bonds. Instead, the focus has been on mid cap securities, and especially Europe.

By adding more funds in these segments, investors may be able to ride a flows wave higher. These sectors have seen strong inflows during a turbulent market environment, and thus could be poised to run should market conditions improve this month.